Why Lifting The Payroll Tax Cap Matters

The payroll tax is a flat tax on wages with a ceiling. It takes 12.4% of the first dollar a home health aide earns and stops at $184,500 in 2026. A CEO pays their whole year’s Social Security tax before they go to bed on New Year’s Day. And only what is narrowly called ‘wages’ is taxed. A hedge fund partner pays the tax on a sliver of their income and pays nothing on dividends, capital gains or carried interest. Raising the rate on that base would close the gap, but it asks ordinary workers to pay for a debt they did not create.

Better still, leave workers’ rates alone and expand the base to all forms of compensation and to investment income — the income that has escaped the program for nine decades. The Roosevelt Institute’s Stephen Nuñez wrote that the trust fund’s troubles reflect a deeper failure: “the economy is failing to support Social Security.” Demographics were forecast with precision back in 1983. What broke the math was inequality, which pushed an ever-larger share of national income above the cap and into capital income the tax never sees.

Ida May Fuller And The Program’s Legacy Debt

Meet Ida May Fuller, a legal secretary from Ludlow, Vermont, and the first person to receive a recurring monthly Social Security check. She worked under the program for about three years and paid $24.75 in payroll taxes. Her first check, dated January 31, 1940, was $22.54, nearly her whole lifetime contribution in one envelope. She lived to 100 and collected $22,888.92.

Ida was not gaming anyone. The program was built to pay her. Checks went out almost at once to people who had never worked a full career under the system, because lifting the Depression-era elderly out of poverty could not wait 40 years. That humane choice created a bill that never went away.

Economists Peter Diamond, a Nobel laureate, and Peter Orszag named it the legacy debt: early cohorts received benefits far beyond what their contributions plus interest could finance, and every later generation of workers carries the difference. Diamond and Orszag quoted a study that found "roughly 3 to 4 percentage points of the 12.4% payroll tax would be devoted to financing the program’s legacy
debts." Cohort transfer estimates in SSA economist Dean Leimer’s Social Security Bulletin article sized the debt at about $20.9 trillion for cohorts born through 1949.

Set those figures beside the new 4.42% deficit and the picture changes. A big share of the gap is not modern excess. It is the program’s starting debt — from Ida’s cohort — still circulating. Another major cause of the deficit is growing wage and wealth inequality.

Why Taxing Investment Income Belongs In The Fix

Taxing investment income is also not a new or radical idea. Here is the lost history. The architects expected the whole progressive tax system to help pay for the program. The 1935 planners projected a general revenue contribution by the 1960s, and Congress made it law in 1943, when the Murray amendment to Section 201 of the Social Security Act authorized general revenue appropriations to the trust fund whenever payroll taxes fell short. The provision was repealed in 1950, when the payroll tax rate finally rose. Reaching beyond wages was the plan all along.

Restore the 1943 Murray amendment and remind Congress that Republicans and Democrats once wanted general revenues to fund Social Security*.

Three Bills Already Target Investment Income

The serious reform bills have rediscovered a way to broaden the base to fund Social Security.

Senator Whitehouse and Representative Boyle wrote the Medicare and Social Security Fair Share Act, which applies the 12.4% tax to earnings above $400,000 and — the part everyone misses — to net investment income above $400,000, with the money flowing straight to the trust funds. The SSA Chief Actuary scored it as reaching sustainable solvency for the full 75 years; the investment income piece supplies nearly half the fix.

Senator Bernie Sanders’s Expansion Act draws on wages and wealth. It reapplies the 12.4% payroll tax to earnings above $250,000 and taxes investment income — the capital gains, dividends, and business income that make up most of what the very rich take home.

Representative John Larson’s Social Security 2100 Act, which he has carried in every Congress since 2014, taxes both bases and closes nearly 90% of the gap.

One caution: every score predates the new report’s larger deficit, so each bill now closes somewhat less than its headline. The direction holds.

None of these bills cuts benefits, and none should. Employer-based pensions are barely adequate and working longer makes no practical sense. Means-testing benefits, though superficially attractive, sets a silly precedent: refusing to pay insurance benefits to people because they have high incomes. Should we means test auto insurance or house insurance payouts? Let the income tax compress incomes. The right instrument for recovering money from rich retirees already exists. It is called the progressive income tax. Kathleen Romig of the Center on Budget and Policy Priorities drew the same conclusion from the new report: “policymakers should start with those with higher incomes and wealth.”

A Not So Wild Proposal That Explains Social Security Financing

Tech IPOs are going to create a lot of wealth fast. A longer story. But say some of that wealth, and other wealth from billionaires, accumulated in a Sovereign Wealth Fund. Here’s a thought experiment ripped from this week’s weird news: suppose one of the AI sovereign wealth funds now being floated — the kind capitalized by SpaceX shares and frontier-model profits — wired $30 trillion to the Social Security trust funds. The program would be in approximate 75-year actuarial balance. The interest on that corpus would substitute for the payroll revenue the program lacks since Congress hasn't meaningfully added in over three decades. Indeed, the last time Congress touched the income taxation of benefits, in this year's One Big Beautiful Bill, it moved money out of the system.

But even a windfall wouldn't finish the job. The 4.42% deficit the Trustees reported this week is a 75-year average; the annual shortfalls grow far larger toward the end of the window. A lump sum that zeroes out today's balance still leaves the program drifting back into deficit as each new year rolls a worse one into the valuation period. The actuaries call the real goal "sustainable solvency," and getting there means Congress still has to do the unglamorous work: raise the rate, broaden the base.

The good news is that we're all looking at the same numbers — and the American people are clear about what they want: work should pay, and it should pay in economic security.